The Sneaky Price Increase

Harvard Business School´s Working Knowledge site has just republished a fascinating piece from 2004 in which HBS marketing professor John Gourville tells us something we should already know, but don´t: Consumer products companies "raise prices" on us constantly by reducing the quantity of product they sell for a certain price. (Examples: coffee, breakfast cereal, ice cream.) Prof. Gourville maintains that these companies have found that reducing quantity while retaining the price point works better than keeping quantity constant and increasing price. Companies selling technology services to businesses face similar issues underlying costs (typically labor and benefits) rise, yet customers don´t want to pay more. It´s even more of a challenge, since tech buyers have come to expect prices to decline for the products and services they buy.

One way to implement the sneaky price increase in business is to reduce the service level of an offering (say, the maintenance response times or the hours tech support is available) and keeping the same price. Yet these items are frequently contracted and not able to be altered freely. Also, the people pushing back on price (procurement or finance) are typically different from the people using the service (IT or operations).

As opposed to the sneaky price increase, many services companies would be better off using a tool that they already have at their disposal the regular, small, price increase. Many contracts allow the supplier to change price at certain periods of time (often yearly), yet many companies don´t use this tool. As a result, prices don´t change for years--and then, when a price increase is unavoidable, it´s surprising and painful to the customer.

So, negotiate the ability to raise price into your services contracts. And then, use that ability regularly, in small doses. Your customer relationships will be better for it, as well as your bottom line.

Music at market prices...

Amie Street aims to make it easy and affordable for consumers to discover new independent music. What makes it unique? Every song sold at the ´fly little music site´ starts off being free, and the price increases to a maximum of USD 0.98 depending on how many people download it. The more popular a song, the faster its price will increase to 98 cents. Besides giving early buyers a better deal, the market price system gives them the added pleasure of seeing they´ve discovered a song or artist before everyone else has.

Members are also rewarded for recommending music. As explained by Amie Street: "We know music is social, and the process of music discovery is stunted by traditional digital music retail sites because they are not social (or fun). Music discovery is best catalyzed by communication between people, so we reward fans for recommending songs to their friends by giving them credit to buy more music."

If a member recommends a song, they´re credited with the song´s price increase. So, if you recommend a song while it´s priced at 10 cents, and the price goes up to 90 cents, you earn 80 cents worth of credits.

Artists maintain full ownership of their work and receive 70% of every sale after a first USD 5 to cover storage, bandwidth and transaction costs for that song. All MP3s sold through the website are DRM-free, so can be used on any music player, without restrictions. Combined with the knowledge that artists are getting their fair share of a song´s revenues, that should make consumers more willing to pay for music downloads.

60% of the internet surfers compares prices through the internet

Online price comparision is rising. 60% of the internet visitors searches on the net for the lowest price. This is a conclusion of Trendbox. Another conclusion of Trendbox; it is rare to have consumers that to not do home banking.

Online prijsvergelijking is in opmars. Van de internetters zoekt zestig procent op het web naar de laagste prijs. Dat concludeert Trendbox. En consumenten die niet online bankieren, zijn een zeldzaamheid. Het marktonderzoeksbureau Trendbox peilt sinds 1995 het gedrag van consumenten op internet. Voor het eerst is in het Trendboxonderzoek de vraag meegenomen hoeveel mensen via internet prijzen vergelijken. Zestig procent van de internetters blijkt dit te doen.

Coca Cola guessed right with their price increase (of 40%...)

Coca-Cola guessed right during the supermarket price war by introducing a new soft drink bottle. The constantly price reduction of cola has stopped. The soft drink producer introduced new plastic bottles for cola and other soft drinks one year ago. For the bottles there is a deposit of 25 cents. The introduction involved a price increase of 40%. thanks to this price increase, Coca-Cola is again on the same price level than before the supermarket war.

Coca-Cola heeft in de prijzenoorlog van de supermarkten goed gegokt door een duurdere nieuwe frisdrankfles te introduceren. De prijsverlaging van cola is tenietgedaan. De frisdrankenfabrikant introduceerde een jaar geleden nieuwe plastic flessen voor cola en een aantal andere frisdranken. De flessen kennen een statiegeld van 25 cent per stuk.

De introductie ging gepaard met een prijsverhoging van 40 procent, schrijft Distrifood. Dankzij deze prijsverhoging is Coca-Cola weer terug op het prijspeil van voor de supermarktoorlog. Een fles van anderhalve liter kost nu ongeveer 1,24 euro tegen 89 cent een jaar geleden. De maatregel kostte de fabrikant volgens de Telegraaf 1,5 procent marktaandeel, maar leverde wel meer omzet op.

99-cent pricing hooks hoppers

Only $9.99? I’ll take it! But at $10, fuhgedaboutit! And that, researchers say, explains why so many goods and services have prices ending in .99

In classical economic theory, consumers make rational choices based on price comparisons and other objective factors. So any shopper who’s looking at a $49.99 cell phone knows he’s in effect paying $50, right?

Wrong, say business researchers who have studied this issue. Not only do people make all kinds of purchasing decisions that aren’t rational, they say, but they’re particularly susceptible to the kind of offers cited above, which are known in the trade as “9-ending” or “just below” prices. Studies show the technique not only influences people’s perceptions of prices, but boosts their buying.

Source: Mark Roth www.post-gazette.com